Moorpark couple want to break cycle of financial mismanagement

Shadowed by debt and a bad bet on real estate, Michelle and Mike Nicholson want a fresh start for their growing family.

With their second child on the way, the Moorpark couple will need to move fast. The Nicholsons’ finances are so precarious that a job loss or unexpected medical costs could spell catastrophe.

“They’re close to being in real trouble,” said Stephan Goyette, a certified financial planner in Thousands Oaks who reviewed the Nicholsons’ finances. “They’re not at a point where they can’t dig themselves out. But I don’t want them to get to a place where they need to consult a bankruptcy attorney.”

Mike Nicholson, 33, works as an art director at an advertising agency in Burbank. Michelle works part time as a personal assistant. Together, they earn $104,000 a year. But they’ve spent more than they made most of their adult lives.

They carry $21,000 in credit card debt, paying interest rates as high as 19%. They have little savings and few assets. Last year they gave up their home in a short sale, and they will soon have another tiny mouth to feed.

“We’ve always put the cart before the horse financially,” said Michelle Nicholson, 38. “It’s time to be more conservative.”

It won’t be easy. Michelle and Mike said they both came from families with money troubles, so their profligate habits developed early. By the time she was 19, Michelle said, she had racked up $9,000 in credit card debt from shopping sprees with her mother.

The Nicholsons started their married lives together in 2000 with combined credit card balances of $15,000. They said “charge it” almost as soon as they said “I do,” using plastic to pile on thousands of dollars more in debt to finance their Caribbean honeymoon cruise.

Unexpected events also set the couple back. Shortly after she got married, Michelle lost her job. Two years ago she discovered that she had skin cancer, triggering thousands of dollars in unanticipated medical costs.

The couple’s debt inflated with the real estate bubble. Mortgage brokers peddled easy money and asked few questions. The Nicholsons couldn’t resist.

Michelle qualified on her own for an $800,000 mortgage, despite earning just $53,000 a year as a personal assistant. In 2006 the couple bought a three-bedroom, 1,600-square-foot home in Moorpark for $620,000, with no money down and an adjustable interest rate that started at around 6%.

As home values escalated, the couple refinanced to a fixed-rate loan with a balloon payment in 15 years. As part of that deal, they borrowed an additional $40,000 to pay off their credit cards and car loans -- a risky move for a couple with no financial discipline.

“Unless you’re changing the underlying spending behavior, when you borrow more money against your house, you’re just trading short-term debt for long-term,” Goyette said.

Indeed, the Nicholsons’ credit card debt mounted anew. Michelle gave birth to their first child, Kaia, in 2006 and cut back to part-time work. Her earnings plunged to $1,000 a month from $4,400. The couple struggled to meet their $3,600 monthly mortgage payment and other expenses.

To get out from under that burden, the couple unloaded their house last year for $460,000 in a so-called short sale, in which the bank agreed to accept less than they owed on it. That freed them from $660,000 in home loans, but also left them with few assets beyond their personal belongings.

Mike has about $14,000 in his 401(k) retirement account. The Nicholsons have little else saved.

The couple now rent a home for $1,900 a month, significantly less than their old mortgage. But they’re still suffering financial fallout from their bad housing bet. Their credit scores, once in the high 700s, have taken a hit. Michelle’s score fell to the low 500s and Mike’s to the low 600s. With scores that low, they face higher interest rates on all financial products.

They’re already feeling it on their credit cards. Higher rates have bumped their minimum monthly payments to around $500. Meanwhile, they’re still paying down $6,000 in charges for property taxes, utility bills and home maintenance expenses on a home they no longer own.

“We tend to have the mind-set that we can manage things financially,” Mike said. “We tend to say: ‘Let’s do it. Let’s try.’ ”

The Nicholsons’ risk-taking will have to change if they want to break their cycle of money mismanagement.

“None of this is going to be easy for them,” Goyette said. It may take two years before they are in the clear, the planner said.

To start rebuilding their credit and get out of debt, the Nicholsons will need to cut expenses. They spend about $1,000 a month on groceries and $420 on entertainment. Goyette wants them to shave $5,000 annually off those bills -- a nearly 30% reduction -- and use that money to pay down debt.

It’s difficult for most people to cut more than 10% to 15% of discretionary spending from the household budget, Goyette said. To ease the pain, he said, the Nicholsons need to make more money. The planner wants them to bring in an additional $15,000 before taxes by having Michelle work more and Mike moonlight.

Because Mike’s employer doesn’t match his 401(k) contributions, Goyette recommended that the couple temporarily stop putting money into the retirement account until they’re out of debt.

The planner also wants them to reallocate Mike’s existing 401(k) savings, reducing the stock portion to 25% from 90% now, then reinvesting the rest in bonds and money funds.

“They’re not in a position to take risk anywhere,” he said.

Goyette recommended that the Nicholsons create a financial cushion for themselves by saving a recent $10,000 windfall from selling Mike’s 1966 Mustang.

He said they needed to consult their accountant to see if they owe taxes on their home sale. Because of federal laws offering relief to homeowners, the planner believes that the Nicholsons will be exempt from paying taxes on their home sale. But if they wind up owing taxes, he said, they should pay them immediately from their newly created savings fund.

Once the Nicholsons are out of debt, Goyette said, they need to keep a lid on spending and set aside at least 10% of their gross income for savings and retirement contributions. If they hope to own a home again, he said, they need to be extra diligent, saving enough for a 20% cash down payment. College savings for the children would require an even stricter regimen.

Mike said it would be tough for the couple to bring in an additional $15,000 now, especially with another baby on the way and California’s unemployment rate at 12.4% in December. But he said knowing that they needed to earn more would motivate them to bring in whatever extra income they could.

The Nicholsons said they were beginning to get serious about slashing expenses. They’re trading sit-down dinners out for Costco hot dogs. They’ve switched to a basic cable package and are clipping grocery coupons. Michelle has already put $400 toward debt reduction. They’re also looking at renting a cheaper home.

Heeding all of Goyette’s advice will be difficult, Mike admitted. But he said he and Michelle are eager to get to work on a new financial future. “We’ll put our noses to the grindstone and do what we can,” he said.

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